This article considers some of the issues arising from the current COVID-19 (coronavirus) pandemic in determining fair value for financial reporting. Fair value is used for valuing many public sector assets, primarily property, plant and equipment.

Queensland Treasury has issued Non-Current Asset Policies for the Queensland Public Sector (NCAPs). Individual local governments often have similar policies to the NCAPs.

The general understanding is that comprehensive revaluations are required every five years. However, the policy also requires a specific appraisal to occur more frequently if indicators exist that the asset class has experienced a significant and volatile change in value. Significant changes are where values have changed by 20 per cent or more. They also need to be highly volatile, meaning the changes are over a short period.

Each entity’s situation needs to be considered individually. However, here are our general thoughts on whether we think asset classes are likely to move by more than 20 per cent over a short period:

• For current replacement cost valuations of public infrastructure and specialised buildings, we are not currently anticipating a significant change in value as a result of COVID-19.
  
  Our experience tells us that these classes of assets are rarely volatile.
  
  In terms of gross replacement costs, a lot of construction work will pause, meaning that there is less data available to make judgements. There is not yet evidence that construction costs will be higher or lower when work recommences. For accumulated depreciation, the condition and useful life of these long-lived assets is unlikely to change due to the virus.
  
  During the current situation, your entity may not be able to undertake a comprehensive valuation. For example, due to travel restrictions on valuers.
  
  If the restrictions mean that you would be in breach of your comprehensive revaluation policy or NCAPs, please speak to your engagement leader as there is likely to be simple, workable solution. We also have a fact sheet on what could constitute a suitable alternative valuation when site visits are not able to be performed by external valuers. 
   
• The valuation of assets prepared using income-based valuation models are likely to be impacted.
  
  The main things to consider are discount rates and cash flow forecasts, particularly trends post February 2020.
  
  Your entity should assess other economic and financial announcements and directions, including ministerial directions issued to government owned corporations that impact revenue and cost structures, fee relief, refunds, subsidies to customers, changes to asset maintenance programs, and revised cashflow forecasts due to changes in capital works programs and priorities.
  
  You should also consider the significance of the government-related COVID-19 economic relief packages (for example, the industry support package) on inputs to fair value.
  
  With the current uncertainty and volatility, there may be some impacts when determining fair value with reference to market prices. While market prices may seem to be subject to a short-term fluctuation, or aberration, compared to a long-term value, market prices must still be used at reporting date. 

Materiality should also be considered when assessing valuations. Rolling valuations may mean that only one or two asset classes are due for a comprehensive valuation this year. If the most material classes are still within their cycle, and it is only one of the smaller classes due this year, it may be possible to defer the specific appraisal of the smaller classes of assets and perform an alternative overall assessment.

We understand that you may have trouble completing your valuation in accordance with your planned timetables.

Please continue to discuss your specific circumstances and timetables with your engagement leader.

For more information on the opportunities and challenges for entities and auditors, where physical inspections by expert valuers are restricted from fair valuing physical assets, please see our fact sheet What to do when government restrictions prevent site visits by external valuers.